World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Thursday, January 8, 2009

Our economy’s function is to direct capital, that’s money, labor, and natural resources, in such a way as to benefit society’s goals. From that perspective, spending a couple TRILLION on the nation’s power grid to digitize it and to turn it into a “smart” grid seems like a brilliant idea – the good. Unfortunately, while this is a FAR BETTER use of funds than throwing money at bank robber barons (the bad), it’s still spending money that we do not have – the ugly. And, as you will find out if you read the linked article, it will take billions just to repair the existing infrastructure… the ultimate price tag for a fully modernized smart grid? It’s just a little bit more expensive than a couple of measly billion; it is approaching $2 trillion!

THE GOOD

First let’s talk about the good aspect of a smart power grid. As envisioned, a smart system would communicate through its lines to everything that’s plugged into the grid, right on down to every appliance in your home. That way power could be better matched to demand. Power lines carry alternating current, but at the same time they can also carry digital information. The UK has a company that helped to develop and already provides internet service over power lines (NORWEB, North Western Electricity Board), so that technology is getting pretty well understood. Here’s how it works: http://www.explainthatstuff.com/broadbandoverpowerlines.html. In fact, there are companies trying to push for this in America, Google is among them Article; Broadband's power-line push.

A new grid would also be more efficient. Larger cables would be strung and that could provide about a 10% bump in the efficiency of carrying electricity across large distances (which is another topic of debate as the grid could be decentralized vs. our current centralized system). More capacity will be needed if we remain centralized, especially if we’re going to make a push to electrify automobiles, which, in my opinion we should. There are huge leaps being made in electrical technologies and we need to be putting our efforts and resources there, not into more of a petroleum based economy. This is one arena where I would argue that the market is not free – the oil industry is too powerful, they exert too much influence over our political system. Their influence makes a good argument that corporations should be separated from all forms of influence over the state.

Here’s a link to a CNN article that came out today and stimulated my thoughts about the power grid proposal:

A $2 trillion bet on powering AmericaThe stimulus plan might jump-start investments, which could drastically change how we use electricity.CNN article, A $2 trillion bet…

In Jim kunstler’s “The Long Emergency,” he sees the petroleum based suburbia economy coming to an end. I’m NOT so pessimistic, I believe that electric transportation IS RIGHT AROUND THE FIGURATIVE CORNER despite the petroleum industry’s attempts to thwart this. The technology is on the verge of becoming compelling, even with modest oil prices. Advanced super capacitors that use new carbon nanotube technology and new batteries are making huge breakthroughs, while at the same time our ability to control power and make electric engines smaller, lighter, and more powerful is on an exponential curve. That’s why Boeing went with electrical actuators for their flight controls on the 787, they also replaced most hydraulic and pneumatic systems with electrical ones as well. That’s the future, real progress is being made in this field.

Another mind blowing technology is the advancement in electrical flywheel technology. These flywheels can store energy and deliver it back almost instantly for short burst applications and acceleration Link – Flywheel energy storage. A Bellevue, Washington company, AFS Trinity Power Corporation is leading in this field. They have been involved with flywheel technology for uses in space, in powering trains and busses, and using them as backup power sources for the power grid. Now they are using super capacitors and electrical management to produce electrical/hybrid SUVs capable of getting 150 mpg. Exciting stuff! Here’s a link to their site if you’re interested, be sure to dig into their other work besides auto technology – AFS Trinity Power Corporation.

A few years ago, I couldn’t get the concept out of my head of using all this electrical technology to make the world’s first truly high performance and SAFE flying automobile, so I filed a provisional patent on the combination of technologies and how they could be used and put the basic information on a website and you can view it pictorially here: Avicar Aerospace, or read about the basic concept here: Avicar Aerospace introduction.

I only post this information to stimulate thought, this technology would cost billions to develop properly and funding this type of innovation will certainly not come in this environment. There’s a lesson here!

THE BAD

Although technology is developing very rapidly, during the past decade massive amounts of human effort were misallocated towards “financial” innovation. Instead of funding derivatives and over inflated home values, our money system needs to provide funding to innovative and promising new technologies and manufacturing capabilities that can make it on their own. Yes, sometimes government money is needed to move technology forward like how we used to spend money on Aero engineering through NASA but no longer do.

This country built amazing infrastructure; roads and bridges, dams and electrical distribution, airports and air traffic control, water systems and reservoirs, waste disposal, mail, etc. These WERE great systems in their day, but they are aging and require great sums of money just to maintain them. Money we do not have.

That’s one of the problems with owning anything, you must maintain it and your revenue had better be big enough to do so or you’re in trouble. In our case, we used our infrastructure to build other great industries. Now many of those industries are gutted shells of their former selves.

What happened? Free trade for one. The people who control the money and promoted free trade could care less where the production takes place so long as it’s cheap. Hey, that’s cool as long as it’s a level playing field for everyone, but it’s not. Wage arbitrage and overseas competition sounds great, but the fact is that “pulling them up” brings us down. Over the past decade our greatest exports are "financial products" (time bombs) and debt while we import cheap goods from overseas and pay with money that’s truly not backed by anything more than an empty promise.

Now all that’s left is to attempt to print our way to prosperity, and history shows that NEVER works.

I think a lot of this boils down to leadership. Our national priorities have not been effectively mapped out or presented. Of course the root of that problem is our money system that allows corporate influence to dominate politics. This is backwards.

The current dilemma and reality is that we are up to our eye sockets in debt, and that means that we have already spent FUTURE tax income, just as being in personal debt means that you have spent your own personal FUTURE income. Since ALL our future tax income has already been spent, how do we pay for what should have been proper uses of money now?

Infrastructure on the scale being discussed will not pay for itself, sorry. Two Trillion dollars represents approximately $30,000 of additional debt burden for every family of four in America. Remember, all the debts, governmental (Federal, state, and local), corporate, and personal ALL ULTIMATELY GET SERVICED BY THE SAME 305 MILLION PEOPLE. And actually the number is much smaller than that when you consider that over half the jobs in America are either directly or indirectly tied to the government. That leaves less than half the working population to support all the debt, and that math has already stopped working - Death by Numbers.

Those who think that we can do it all, like Obama, are mistaken, they do not understand our money system, debt, capital flows, or how the math works. Our debt based money system depends upon people, both here and abroad, to finance our debt. Debt must be serviced from somewhere. In the case of our government, that somewhere is taxes, and Americans do not have the capacity to pay even more taxes when they are burdened by excessive tax and debt already. Inevitably spending big money on infrastructure now will lead to printing/monetary easing. This will eventually destroy global capital flows and we may be at this point already.

THE UGLY

During the Great Depression, New Deal spending came at a time that had far lower taxes, less government, and less personal debt. My own father worked in the CCC camps during this time building our nation’s park infrastructure which has been a national treasure now for decades. However, unemployment in the 30’s did not recover and by the time WWII started unemployment was still running at 17%, and did not recover until the war “equalized” the employment picture – think about the ways in which the war did that, it's sobering.

Below is a chart of unemployment during the 1930’s (keep in mind that modern media reported figures do not compare to figures during this time period):

Here’s a modern day chart showing the striking and dramatic difference between reported unemployment and how it used to be calculated (courtesy of Shadowstats.com):

My father joined the Navy one year before Pearl Harbor was bombed and was at sea almost the entire duration of WWII. It was one year after the war that he became a civilian, went to the University of Washington and became a businessman. Note the time relationship here… Stocks first crashed in October of 1929, then the bond market dislocated, all along there was stimulus spending via public works projects, Roosevelt created the New Deal from 1933 to 1936, and a decade following the stock market crash in 1939 WWII began. If you look further back in time, you will find the same sequence repeated over and over following times of economic upheaval.

What did the war bring us? A bigger military, a bigger military industrial complex, more deficit spending, and an expensive world wide infrastructure to maintain. Today, we spend more money on our military than the rest of the entire world combined.

Chalmers Johnson – 6 minutes

According to Chalmers Johnson, this progression is typical of empires who are nearing the end of their dominance, and he’s one of the world’s foremost experts who has worked for the CIA, for years as a university professor, and is the author of 3 terrific books on the subject.

Yes, new technology and infrastructure are terrific, BUT... We must be able to finance it, and it must pay for itself over time. Stimulus, by itself, is not a valid reason to assume more debt and yet infrastructure spending seems vastly more worthy than propping up banks and failed companies.

Right now there’s a standoff between the need to spend more on the good; our impossible debts are the bad that prohibits us from investing in needed infrastructure; and the ugly are the likely outcomes of reckless spending and never ending stimulus.

Will spending on the good compound upon the bad, leading to the ugly? Watch to find out:

The Good, The Bad and the Ugly

Perhaps Bernanke didn't catch Clint's line: “You see there are two kinds of people in this world… those with loaded guns and those who dig.”